Europe Still Dominates the Headlines
The vagaries of Europe’s debt crisis continues to be the most important driver of the short-term price action in the foreign exchange market. Indications that Greek New Democracy leader Samaras would sign a letter of commitment to the aid agreement helped the euro stabilize after the sell-off in response to the postponement of the Eurogroup meeting all the Greek elements weren’t in place. However, it is clear that his rhetoric has been such that the key creditor nations in the euro zone remain skeptical.
The euro is trading inside yesterday’s range. In broader terms it remains confined to a $1.30-$1.33 trading range. Market positioning meets anxiety about the debt crisis.
In terms of the debt crisis, there are numerous moving parts and incongruous–such as the PSI seems to have to be completed before the second aid package can be approved, but it requires funds from the second aid package to complete. Huh? The faltering confidence in Greece is occurring at the same time and, perhaps, because, (some) European officials, like Germany’s Schaeuble, argue that Europe is less vulnerable to a Greek default. Others continue to fear a "Lehman-like" event–a highly disruptive financial shock.
There is not going to be any meaningful closure in the days ahead. Moreover, it seems that even if Greece jumps through all the hoops and makes all the concessions, that we won’t be here again. The necessary economic contraction makes the still high debt level (120% in 2020 as a target) unsustainable in any kind of meaningful way. This is the lesson that Portugal may teach. It is likely to continue to received high marks for implementation but the weaker growth profile makes its debt unsustainable.
The Q4 GDP reports were mixed. France surprised by not contracting (+0.2% quarter-over-quarter). Italy and Netherlands surprised on the downside. Both reported a contraction of 0.7%, compared with expectations of -0.5/-0.3 respectively.
The key question remains where is aggregate demand going to come from. In Germany, we know. It has an under-valued currency. There is little doubt that it would be stronger if it weren’t for monetary union. 40% its GDP or so will be exporter.
Turning to the US, there is a slew of economic data. The TIC data is among the least important. It will show details of US portfolio flows for December. Instead, look for the market to focus more on the data showing that the economic strength from Q4 (yes look for a strong upward revision) has carried over into Q1. This will be the January industrial production data and Empire Mfg for February. Note that the inventory to sales ratio is low and this suggests the build up inventories in Q4 won’t have to be a drag on Q1 12.
This is important too for the other event today and that is the publication of the FOMC minutes. It will be scrutinized for insight into the prospects for QE3. The economic data will give the doves little ammunition to advance their position. If Bernanke is looking for an opportunity, it does not exist currently.